Estimating the Euler Equation for Output Estimating the Euler Equation for Output

By Jeffrey C. Fuhrer and Glenn D. Rudebusch

Revised article published in Journal of Monetary Economics vol. 51, no. 6 (September 2004): 1133-1153.

New Keynesian macroeconomic models have generally emphasized that expectations of future output are a key factor in determining current output. The theoretical motivation for such forward-looking behavior relies on a straightforward generalization of the well-known Euler equation for consumption. In this paper, we use maximum likelihood and generalized method of moments (GMM) methods to explore the empirical importance of output expectations. We find little evidence that rational expectations of future output help determine current output, especially after taking into account the small-sample bias in GMM.

This paper was revised in May 2003.